Stanford and Its Startups

Stanford University is a wealthy school. Its seventeen-billion-dollar endowment exceeds the G.D.P. of Jamaica. But the university, which is constantly under construction, is surrounded by even greater wealth: Facebook is to the north, Apple to the south, Google to the east, Sand Hill Road to the west. Stanford is like a man sailing a beautiful new boat who looks around and sees his friends in yachts.

Stanford’s board of trustees began, in the mid-aughts, to gaze at the masts around the Bay, according to Randy Livingston, the university’s chief financial officer. Every major American tech company has some deep connection to the university, and the trustees began to ask questions, Livingston told me. “Why aren’t we investing directly in these ventures? Why are we creating all these opportunities and seeing the venture capitalists disproportionally profit?”

Last week, partly as a result of those inquiries, Stanford announced that, in partnership with its hospital, the university will begin investing in companies founded by its own students. Scholar-entrepreneurs can now apply to a start-up incubator called StartX, which was itself created by students in 2009. Until now, StartX has mainly offered training and opportunities for networking, and office space just off campus. Now, accepted companies will also be offered university money. StartX accepts eight to ten per cent of applicants. If they’re good enough to get accepted, and good enough to raise at least half a million dollars with support from serious outside investors, they’re good enough for Stanford’s endowment. The university intends to fund about ten per cent of each investment round. The initial numbers will be small—think Ashton Kutcher with palm trees—but Livingston expects that, in five years, the university will distribute between fifty and a hundred million dollars. In return, the school gets equity and, maybe one day, cash. This past spring, I joked that the university resembles “a giant tech incubator with a football team.” The football team is ranked fifth in the country; the incubator is surely ranked first.

Stanford has always played the role of Silicon Valley’s queen mother—and, sometimes, its handmaiden. The university likes to boast that its alumni and faculty have founded close to forty thousand companies. Stanford has given us search engines, synthesizers, and glowing mice. Its best students invent products, while the best students from so many other places go on to develop new methods of financial engineering. Last year, Stanford changed its logo because the old one didn’t look good on an iPhone. (A disclosure and a tiny data point: I’m an alumnus and the co-founder of a Silicon-Valley backed company.)

But Stanford’s partnership with Silicon Valley has also raised ethical issues. Stanford professors, for example, often invest in companies founded by their students. This past spring, a company called Clinkle made news for this reason—it was funded in part by professors, and the university’s president had been an adviser to Clinkle’s C.E.O. when he was an undergraduate. As I wrote then, Clinkle raised complicated questions about values and conflicts: Do students get good grades if they start a company that their professors invest in? What happens to a student who wants to create a competitor to a company the chair of his department has already helped fund? Professors have coercive power, which isn’t the best thing to pair with financial opportunity.

StartX seems less problematic. For one, the incubator has been structured to limit such murky conflicts, according to Clifford Nass, a professor of communication and an advisor to the project. Some professors do invest in StartX companies, but they may not invest in ones to which they are official mentors. Other potential conflicts seem small. Will Stanford’s admissions department feel some slight additional pressure to admit kids who could bring gold to the endowment? Perhaps. Will there eventually be so much pressure to start companies on campus that students create preposterous ones? That’s probably already happening. I spoke with Charles Guo, a student who founded a StartX company two years ago. Since then, he’s seen a shift in the motivations of company founders. “It’s not, ‘I’m going to solve Problem X,’ ” he told me. “It’s ‘I want to start a company.’ ”

But here’s the most serious question raised by the investment: Is Stanford starting to agree with Peter Thiel’s vision for universities? Two years ago, Thiel, a Stanford alum and billionaire investor, decided that university education was one of the last remaining bubbles in America. Students pay a lot, accumulate debt, and graduate with little to show. Going to work is often better than going to class. Thiel offered to give a hundred thousand dollars each to a select group of promising students who drop out of college. Last year, a hundred Stanford students applied.

Stanford’s new investments seem, on the one hand, to be a challenge to Thiel. Students will now have an easier time starting businesses while they’re enrolled or on leave. “Giving kids an option is always good,” said Nass. But the partnership with StartX also feels like an officially sanctioned version of the Thiel Fellowship. Drop out and make money—as long as we get a cut. Livingston said that Thiel didn’t come up during discussions about the program, and he noted that many people create start-ups and go back to the classroom; his own son, a student at Stanford’s business school, is one of them. But the point of the partnership with StartX is to make Stanford wealthier, and the founders who contribute to that end often don’t come back. Tellingly, the chief product officer of StartX describes herself on the company’s bio sheet as “Stanford, Human Biology (dropped out).” When Livingston was asked on Bloomberg about students dropping out, he said, “We like students to get their degrees, but we’re very proud of students whether they get their degrees or not.”

Stanford’s computer-science department may become like the Kentucky basketball team: a way station for the country’s finest talent. The Wildcats have been good for the N.B.A. And maybe what Stanford is doing will be good for the country. There are students who should be writing code and raising money instead of reading Swift or playing cello. In fact, there may be students who stay for more time than they should. Nass told me that, for too long, the incentives in computer science have worked in reverse, noting that professors with brilliant students are often motivated to “keep them around forever, being paid virtually nothing.” It’s also the case that universities have to evolve. Stanford’s founding grant declared that it must maintain “a farm for instruction in agriculture in all its branches,” a requirement that sounds antiquated today. And there’s nothing wrong with Stanford getting richer: endowments can be spent on scholarships, microscopes, and books.

But at some point, the blurring of lines between the university and the tech industry comes at a cost. If the university is a farm, do the students become the cows? One of the Valley’s great maxims is Facebook’s invitation to “move fast and break things.” For now, at least, Stanford is moving fast. It’s unclear whether undergraduate education is one of the things it will break.